What to Know When Filing a Tax Extension

The deadline to file your taxes is nearly here. Perhaps you are still waiting for the right paperwork in order to file your tax return. Or maybe your life circumstances have changed, and you are feeling overwhelmed.

You may be considering filing for either a federal or state extension in order to effectively manage this annual obligation. When you file an extension on April 15th, you could have until October 15 to file your taxes. June 15th is the extension due date for people in the military, and those who are living outside the United States and Puerto Rico and whose main place of business or post of duty is outside the United States and Puerto Rico.

People often ask me: Does the IRS consider it a red flag if you file an extension? The answer is no. In fact, the extension is essentially automatic. For your federal return, just file Form 4868, the Application for Automatic Extension of Time to File, by the regular due date of your return. If you’re filing an extension for a partnership, corporation, trust, or other entity, file Form 7004.

You can find your state tax extension form on your state tax authority’s website.

Just because the IRS automatically accepts your extension doesn’t mean there aren’t some additional considerations. Here are some things to know before you file an extension:

1) If you don’t have all of your tax paperwork together, it may be wise to file an extension until you get all of your documents and can prepare a proper tax return. If you think you’ll need an extension, you may want to consider filing for an extension sooner rather than later.

2) An extension of time to file your tax return does not mean you have an extension of time to pay your taxes. You still need to pay at least part of what you expect to owe for the year by April 15th.

What happens if you don’t? You will have to pay a penalty of 0.5 percent per month, up to 25 percent, plus interest of 3 percent per year.

If you’re short on cash and plan to forego a full payment and pay the penalty, you may still want to send at least $50 with Form 4868. That way, if the IRS cashes your check you have proof that they received your extension, without paying for certified mail or standing in line at the post office.

However, there is a special provision to avoid the late payment penalties due to hardship. You can use Form 1127 for this, and will need to show that paying the tax at the time it is due will cause undue financial hardship. You will need to include supporting documentation, including a statement of assets and liabilities or an itemized list of income and expenses.

3) You must tell the truth on your extension. On line 4, where it asks for your expected tax liability for the year, you should tell the IRS how much you really expect to owe. It’s OK to estimate the amount, but come up with a reasonable estimate. Even though you’re only sending $50, if you expect to owe $10,000, say so. If you don’t make a proper estimate of your tax liability, your request for an extension could be denied.

You may file on paper or electronically through your tax software. If you owe the IRS and need to send money with your extension, you can do it online and get instant confirmation and proof of filing your extension.

If you’ve worked with a tax professional in the past and plan to use them again, contact them to let them know you need an extension. Be sure to keep your refund in mind, too—if you’re owed a big refund, it may be worth scrambling to get your tax paperwork together rather than filing an extension.

Eva Rosenberg, EA is the publisher of TaxMama.com ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches terrific courses that might help individuals and small businesses at CPE Link.